Rolling the dice

Thomas Knowles '99 graduated from Princeton with more than just a world-class education. He concluded his years as an undergraduate facing a mountain of debt.

The monthly payments on his Princeton Student Loan and federal Stafford Loans amounted to about $148 per month — too much for Knowles to pay as a systems administrator in Princeton's computer science department.

But Knowles was not destined for financial ruin. After he missed a few payments, he received a call from the student loan office and was offered a way to get back on track.

The plan allowed him a five-month postponement in payments, during which interest still accrued on his loan. At the end of this period, the interest was added to the principal owed.

Now, Knowles' monthly payments amount to about $150 — only $2 more than what he was paying before.

Despite his difficulty making the payments, Knowles says he understands he needed the loans to make his college education possible. "I've had nothing but great experiences with [the student loan office]," he said. "I think the University is actually quite fair with its aid packages."

Student loans are nothing new to the world of higher education. For decades, young academics have sought outside financial help in footing the bills for their educations. And with tuitions at institutions across the country continuing to rise, loans have become a crucial way for the nation's most promising students to make the dream of attending college a reality.

For many, the decision to accept a student loan is a gamble. Most come from families that, on their own, might never be able to repay the principal sum. As a result, students must borrow against the collateral of future earnings their education will likely make possible.

But for some, like Knowles, the gamble does not always pay off with high-salary jobs right after graduation. Especially in recent years, steadily rising interest rates have left some loan recipients just out of school facing significantly larger loan payments that they simply cannot afford.

Steady increase

With the most robust national economy in recent memory, the federal reserve has raised interest rates several times during the past year.

And Stafford Loan rates — which are linked to the federal reserve's rates — took a 1.25 percent hike in July.

The government pays the interest for most Stafford Loans until six months after a loan recipient graduates. But after that period, as a result of the interest rate hike, borrowers will be facing 8.19-percent interest rates.

Get the best of the ‘Prince’ delivered straight to your inbox. Subscribe now »

Despite interest rates' steady climb, University officials encouraged students not to overestimate the significance of the increases.Associate Treasurer and Director of Loans and Receivables John Yuncza said interest rates could easily drop in the years to come. "It may sound worse than it really is," he said.

Many recent alumni said they did not know about the interest rate hike. Rachel Liberatore '98, a former molecular biology major now working at Rockefeller University, said she had not noticed a major difference in her monthly payments.

Indeed, the entire student loan process remains a mystery to many University students and alumni.

It begins each year when a student submits his or her Free Application for Federal Student Aid and College Scholarship Service Profile to the University's financial aid office. That office then meets the student's financial need with grants and self-help aid, such as a campus job or a student loan.

Every year, Princeton's Priorities Committee recalculates the maximum-loan level. For example, the maximum loan for a junior this year is $5,500. Capping the amount of student loans helps students keep borrowing to a reasonable level, according to University Associate Director of Undergraduate Financial Aid Robin Moscato.

Most student loans are divided into Perkins loans — which are made directly through the University and have a fixed five-percent interest rate that the government pays until nine months after graduation — and Stafford loans, which come from private lenders and have variable interest rates.

In addition, the University offers its own loans, called Princeton Student Loans, which students must pay interest on even while they are enrolled at the University.

After the financial aid office distributes the aid packages, students who received Perkins loans are asked to sign a promissory note.

For a Stafford loan, however, the financial aid office submits the student's loan information to Sallie Mae — the student loan agency that administers 99 percent of all Stafford loans at Princeton, according to University Student Loan Manager Joseph Zdanowicz.

After the financial aid office electronically has submitted a student's loan information to Sallie Mae, the student receives a promissory note to sign. The treasurer's office then downloads all the pending loan information from the Sallie Mae system and credits the loan to the student's account, minus a three-percent origination fee from Sallie Mae.

And while the process of securing and repaying loans is a complex one, it does not seem to impede students' ability to make the most of their education experience.

Carolyn Mordas, a chemistry graduate student at the University, has a debt of about $24,000 from both Perkins and Stafford loans. But as she pursues her postgraduate degree, she said she tries not to allow her substantial debt to distract her.

"I'm not worried," she said, "because it's still make-believe money right now."